It has been said by many that
the banking sector was the darling of the stock market during 2006,
reasons being strong profitability and ongoing mergers &
acquisitions of the banks.

BY KHALIL AHMED
Senior Correspondent
Jan 15 - 21, 2007

According to John Cole, a partner at
consultants Ernst & Young, heavy mergers and acquisitions (M&A) activity
is one of the hallmarks of a stable, mature economy. This proves true when one
looks at the economies which have been performing well consistently. One of such
examples is that of India.

A massive merger wave swept India in
2002. The then Indian prime minister Atal Behari Vajpayee wanted to sell more
and more state firms. In only 2002, India had seen more than 430 mergers and
acquisitions (M&A). During the last year, a record $3.7 trillion was
announced in mergers and acquisitions in the USA. According to Dealogic, top
five deals during last year were: AT&T (US, telecoms) bought BellSouth (US,
telecoms) for $83.4 billion; E.ON (German, energy) bought Endesa (Spanish,
energy) for $66.1 billion; Suez (France, utility) bought Gaz de France (French,
energy) for $43.1 billion; Mittal Steel (Dutch, steel) bought Arcelor (French,
steel) for $39.5 billion; and Banca Intesa (Italy, finance) bought Sanpaolo IMI
(Italy, finance) for $37.7 billion.

It is not vague to find out what is
fuelling the merger boom globally. Some of the reasons quoted for the boom in
M&A activity are a boom in demand for commodities and raw materials, modest
company valuations and the availability of cheap money. It is said that in Asia
mergers and acquisitions are mainly driven by tough economic conditions. Hence
the basic reason to merge has been driven by the need for sheer size to be an
effective as well as productive player locally as well as globally. Since there
is tough competition in all kinds of industries, top executives are feeling
pressure from the stakeholders to focus on mergers and acquisitions in an effort
to improve returns.

The banking sector of Pakistan has been
performing well after the banking reforms introduced in the last decade. Looking
at the capital market, one comes to know that oil & gas and banking sectors
have been doing exceedingly superb job during the last year. It has been said by
many that the banking sector was the darling of the stock market during 2006,
reasons being strong profitability and ongoing mergers & acquisitions
(M&A) of the banks. It is being widely believed that M&A activity is set
to continue apace during 2007. And the speculations are that the banking sector
would see more and more such activity particularly due to the minimum paid-up
capital requirement of Rs6 billion by 2009 by the State Bank of Pakistan. It is
being said that this requirement has put pressure on the medium size and small
banks.

CREDIT TO PRIVATE SECTOR BY BANKS

(Rs. In Billion)

PERIOD

CREDIT TO PRIVATE SECTOR

2003-04

328

2004-05

427

2005-06

417

With strong growth quoted at 45% and
increasing profitability, the banking sector is said to witness more sell-off
and mergers and the expectations are that the European and the American banks
would take more interest in the booming Pakistani banking sector. Expectations
are that with the entry of the western players, the performance level of the
sector will improve further and give even a better shape to the banking sector
of Pakistan with innovative products to attract the potential customers.

Undoubtedly, the western players are
willing to invest in Pakistan due to a few reasons; robust economic growth over
the period of last four years averaging at around 7 percent in the country
having a population of 160 million. One needs to know that population of
Pakistan is an asset and not a burden if looked with the investors"
perspective.

The foreign banks are expressing their
interest in the Pakistani banking sector due to potential growth and expansion
opportunities and also due to the banking spread which may fetch them handsome
returns in a short period of time. The banking spread is around seven per cent
in Pakistan which is an attraction for the foreign banks since in the developed
countries the spread is by and large less than two per cent. With such lucrative
business opportunities, the western banks are eyeing on the banking sector of
Pakistan. With the advent of the big players in the market, big banks would
receive big returns whereas the medium size banks might find it tough to do
business in the highly competitive and the high-yield banking sector.

The banking sector witnessed a series
of mergers and acquisitions last year whereas at present it is believed that
three major acquisitions are in the pipeline. It is a well-known fact that the
central bank of Pakistan has been pursuing a policy to replace small banks with
large banks, arguing that the large banks pose less risk while the small banks
are of high risk.

After the Standard Chartered Bank
purchased Union Bank last year, rumours were rife that UK-based Barclays Bank is
in advanced stage of negotiations with a Pakistani bank mainly sponsored by the
Arab investors. It did not happen but lots of other developments took place.
According to a local newspaper, "During the first six months of the current
fiscal 2006-07, Rupali Bank merged with Arif Habib Rupali Bank and Atlas
Investment Bank into Atlas Bank, mergers of Habib A.G Zurich and Metropolitan
Bank, First Allied Modaraba and Allied Bank Ltd were also completed during the
year-The biggest hit was the acquisition of PICIC by NIB Bank-Acquisition of
Crescent Commercial Bank by Samba Financial Group of Saudi Arabia is also
expected."

One could see more mergers and
acquisitions in Pakistan during this year in the banking sector and it is to be
noted that it is quite a common practice in the world. During the decade of 90s
mergers and acquisitions gained more popularity and mostly big corporations got
merged. French banks led the way in 1999 when Banque Nationale de Paris won a
majority stake in a rival bank, Paribas. The German banking sector went through
a consolidation phase in 2000. In the Indian banking sector, during 2002, ICICI
Bank gobbled up its parent company following the deregulation of the financial
services sector. During 1998, the debt-laden South Korean banking sector was one
of the main targets of a major restructuring drive ordered by the government of
Kim Dae-Jung. The government had previously shut down 14 troubled merchant banks
and five small commercial banks. In 1999 in the UK, merger frenzy particularly
hit the financial services sector, with banks buying up each other.

Well, banks can only compete if they
offer their clients integrated financial services. It would not be wrong to say
that at present too many banks are vying for customers. Let's hope that the
prevalent wave of mergers and acquisitions may offer the customers excellent
services and this may lead to further economic activities in our country. 2006
was a profitable year for the banking sector and it may be hoped that 2007 will
be another bumper year for the sector.

NAFA LAUNCHES TWO NEW FUNDS

National Fullerton Asset
Management Limited (NAFA) is a joint venture between three financial
power houses, National Bank of Pakistan, NIB Bank, and Fullerton Fund
Management Group. Fullerton is a wholly owned subsidiary of Temasek
Holdings of Singapore - a US$75 billion investment Company rated AAA by
both Moody's and S&P.

The CEO of NAFA, Dr. Amjad
Waheed, CFA, was previously Head of Equity Mutual Funds and Portfolios
at Riyadh Bank, Saudi Arabia, managing about US$7.5 billion of assets.
NAFA management includes 4 CFAs, 2 CAs and 27 Masters in Business
Administration and Information Technology.

NAFA successfully launched the
NAFA Cash Fund (NCF) in April 2006. In seven months the Fund size has
crossed Rs 500 crores. It has got a stability rating of 'A' from JCR-VIS
Credit Rating Company Limited. Since launch in April 2006 till December,
NCF has provided an average annualized return of 10.5% to its investors.

NAFA is launching two new
open-end funds, namely NAFA Stock fund (NSF) and NAFA Multi-Asset fund (NMF)
in mid - January. Initial Public Offering (IPO) is set for January 15 to
19, 2007. NSF objective is to provide investors with long term capital
growth from an actively managed portfolio invested primarily in listed
companies in Pakistan.

"NMF is a balanced fund with medium risk
and medium return. The objective is to provide investors with a
combination of capital growth and income by investing in a variety of
asset classes such as stocks, bonds, money markets, CFS, etc.